Number of life sciences cos up 50% in a decade

IATI: The trend in Israel is away from medical devices and towards digital medicine.

The Israeli life sciences industry has slowed slightly in the past two years, in comparison with the global industry. The window of opportunity for Nasdaq issues closed in 2015-2016, but the venture capital funds continued raising money for financing the next generation of promising companies.

The total number of companies in the industry grew, mainly as a result of a boom in digital health. What has slowed over the past two years is the medical devices sector, the former hot spot, which up until now has been responsible for the most impressive exits in the life sciences industry. The changes in the industry have had a negative impact on this sector, but it is still the largest in the industry, although also the most crowded.

These trends can be seen in a detailed report by Israel Advanced Technology Industries (IATI), managed by CEO Karin Mayer Rubinstein. IATI co-chair and life sciences representative and Pluristem Therapeutics president and CEO Yaky Yanay said today, "We issued our previous report two years ago, so we felt it was about time to issue another report. In the coming months, IATI is due to add to the report and use it in working with institutional investors in Israel and with the government for the purpose of further improving the industry."

Over 1,200 companies

According to the report, the number of life sciences companies has grown consistently over the past decade. A decade ago there were 800 companies in Israel, and there are now over 1,200 companies. 110-140 companies were founded a year during the past decade, except for 2016, when only 90 companies were founded. The rate at which companies closed, an average of 62 a year, also slowed in 2016, when only 23 companies closed down. Yanay says, "The number of companies is increasing, among other things because there is an improvement in intellectual property at research institutes and more ability to convert it into commercial companies, due to the accumulation of people trained in entrepreneurship in the companies in this sector."

Another explanation of the increase in the number of companies is the development of the digital health sector, which is considered part of the life sciences industry. The entry barriers in founding digital health companies are substantially lower than for pharmaceutical or medical device companies. This sector is also attracting entrepreneurs and investors who were not previously involved in the classic life sciences companies, including parties that are shorter term players, parties specializing in consumer marketing (but who are not experienced in marketing to health systems), and software companies that do not necessarily specialize in engineering for devices suitable for contact with the human body. These parties have led to the founding of many digital health companies in recent years.

This increase is also affecting the proportion of digital life sciences companies that are digital companies. The sector accounts for 215 companies, 16% of the life sciences industry companies in Israel, the same proportion as pharmaceutical companies.

The medical devices sector still has the largest in the number of companies - 42%, down from 53% in 2014. The decline in investments in the medical devices sector has been clear in recent years, coupled with a drop in the number and size of the venture capital funds working in this sector. The reason is the consolidation of major corporations, which is reducing the number of potential buyers for these companies. In addition, the buyers prefer to acquire more mature companies. This trend has increased the amount of the investment needed by startups in order to reach an exit, and is forcing many companies to show actual sales – mostly in the US – something that Israeli companies have more trouble doing.

Yany comments, "All over the world, the digital health market is growing at the expense of classic medical devices as a result of the changing tastes among the customers, insurance companies, and hospitals. There's less interest now in improving a specific medical procedure, and more interest in using information technologies to prevent the emergence of difficult medical situations, monitoring a patient in order to give him optimal treatment in a hospital, and continued monitoring that will make it possible to send the patient home as quickly as possible, where he has the best chance of getting well."

When you examine the amounts raised by each sector, you see that in this parameter also, medical devices are the largest sector, but are growing less. Private medical device companies raised $390 million in 2016, nearly half of the amount raised by the life sciences, but 25% less than in 2015 (a peak year in the industry). Digital health companies raised $110 million, almost double the amount last year, substantially larger than the average for the past decade, and 13% of the amount raised in the industry. Drug companies raised $230 million, 30% of the total, but 30% less than in 2015.

Down from the peak

$823 million was invested in 132 private life sciences companies in 2016, 15% less than the total in the peak year of 2015, but still better than any other year in the past decade. The number of companies raising money fell, but the average amount raised per round rose.

Venture capital investments in life sciences accounted for 20% of all venture capital investments in Israeli high tech in 2016. Over the past decade, the proportion of total investments made in life sciences was 20-30%. 13% of life sciences investment in Israel was by venture capital funds. Investment by these funds has grown modestly in recent years, compared with the steep rise in investment by other parties.

In addition to venture capital funds, investors in Israeli life sciences companies include Israeli institutions that invest in public companies, incubators, angels, and existing companies that invest in young companies (rare). Investments by Israeli investors (including the funds) in Israeli life sciences companies totaled $312 million in 2016, 37% of all investments in biomed companies in Israel, while foreign investors accounted for 63% of the total. The Israeli venture capital funds raise a significant proportion of their capital overseas, so that the real proportion of foreign investors is substantially higher. Investments in all of the venture capital funds in the life sciences in 2016 totaled $470 million (57%). Other than the venture capital funds, foreign investors in the Israel life sciences industry include private equity funds, financial and industrial Chinese companies, and investors in the technological incubators.

Another source of financing for biomed companies is the public markets. Israel life sciences companies raised $6.7 billion on Nasdaq in the past decade, mostly in the peak years of 2014 and 2015; $1.9 billion was raised for Israeli life sciences companies on Nasdaq in 2014, and $1.7 billion in 2015.

In each of these years, the amount raised on Nasdaq greatly exceeded the total amount invested in Israeli life sciences companies by the venture capital funds. The investments were distributed among a relatively small number of companies, usually in the later activity stages.

Only $366 million was raised on Nasdaq for Israeli life sciences companies in 2016, due to a change in the market conditions. In 2017, however, it appears that the market has opened again, and one life sciences company, Urogen, has already held an offering. A number of companies are preparing to raise capital later in the year.

There is also life sciences activity on the Tel Aviv Stock Exchange (TASE), even though Israeli companies have held no offerings there for several years (the most recent wave was in 2010, and only two more offerings have been held in the sector since. This, however, does not include three US companies registered for dual listing on the TASE in 2015). In 2016, on the other hand, $108 million was raised on the TASE for life sciences companies. This amount was raised by only five out of the 60 life sciences companies listed on the TASE. Another financing instrument is the Israel Innovation Authority, formerly the Office of the Chief Scientist. The Chief Scientist's various programs invested NIS 448 million in life sciences companies, amounting to 28% of the Chief Scientist's budget. Life sciences companies comprise 40% of the companies in the incubators program (30% medical devices companies and 10% pharma companies).

The biomed industry has always been an industry of venture capital-supported companies, only a few of which can raise their own financing. Today only 38% of the biomed companies have revenue, and only 5% have stable and significant revenue.

The industry has matured

When the stages at which the money is invested are probed, it can be said that the life sciences industry in Israel is maturing. Investments in companies at the revenue stage constituted 40% of all investments in life sciences companies in Israel in 2016, combined with a slight dip in investments at the seed stage. The average amount invested per company rose, and financing rounds of $20 million or more accounted for 55% of the entire amount raised by the industry. Not all the $20 million financing rounds were by veteran companies.

Young companies also raised substantial sums in 2016, as a result of a number of factors. One is the entry of Chinese investors, who usually invest large sums. Another is the realization by companies that they need large amounts of capital for a breakthrough in the life sciences, which leads them to embark on larger financing rounds in the first place. The investment institutions and seed investors are willing to suffer more dilution for the right amount. Another factor that has led young companies to raise more money is the establishment of incubators managed by strong franchise holders, who support the most promising companies from the incubators. The number of rounds by seed stage companies rose, while the amount invested in each round fell. Among other things, this can be attributed to the greater proportion of digital health companies among those raising money. These companies need less money at the founding stage than pharmaceutical and medical device companies.

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The most active funds, as measured by the number of deals made in 2016, were OrbiMed Advisors LLC, Pontifax, Arkin Holdings, Johnson & Johnson Innovation – JJDC, the venture capital arm of Johnson & Johnson, and the Ourcrowd investment angels club.

One big exit

Life sciences exits totaled $528 million in 2016. The amount paid to acquire Israeli life companies over the past five years is $4 billion. Total investment in the sector was greater, meaning that someone who invested in every life sciences company founded in Israel during this period would have posted a negative return.

The medical devices market received fewer investments in recent years than previously, but the large investment in this sector from before achieved results in 2016. Medical devices exits accounted for 77% of all the exit money in the life sciences industry. Only one of the exits in 2016 can be considered a major one: Dentsply Sirona's acquisition of MIS Implants Technology for $375 million. The next largest was the sale of Galil Medical for $110 million. This is significant change in comparison with 2015, when there was one exit of only $95 million (CCam), but it represents a relative drop in the number of large exits, compared with the industry's glory days at the beginning of the century.

Digital health companies are sprouting up in Israel at the rate of 30-40 a year. 70% of the companies in this sector are small, with less than 10 employees. Only 5% of the established companies have 50 or more employees. Half of them are developing health management apps marketed directly to the consumer. Other hot areas are medical information analysis (consisting mostly of big data companies in medicine) and hospital and clinical process management. The sub-category that has attracted the most investment is tools for personalizing of medical products and processes.